Can HMO’s and Residential Properties claim Capital Allowances? Reply

Capital Allowances are for commercial properties.

https://stevejbicknell.com/2017/02/21/why-are-capital-allowances-important-on-commercial-property/

They can be worth a lot money, sometimes a third of the property value can be plant and machinery and they are often over looked and under claimed.

There are companies who say you can claim them for HMOs but that doesn’t fit with rules!

Yes you could but them on your tax return but that doesn’t mean you have a valid claim as HMRC have process now and check later approach.

Here are the rules…

Capital Allowances Act 2001

http://www.legislation.gov.uk/ukpga/2001/2/section/35

The person’s expenditure is not qualifying expenditure if it is incurred in providing plant or machinery for use in a dwelling-house.

General: Definitions: Dwelling house

CAA01/S531

There are several references to dwelling house in CAA2001. The term appears in Part 2 (plant and machinery allowances), Part 3 (industrial buildings allowances), Part 3A (business premises renovation allowances), Part 6 (research and development allowances) and Part 10 (assured tenancy allowances).

For Part 10 (ATA) only “dwelling house” is given the same meaning as in the Rent Act 1977 (CAA01/S531).

There is no definition of “dwelling house” for the other Parts and so it takes its ordinary meaning. A dwelling house is a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence. In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but difficult cases may need to be decided on their particular facts. In such cases the question is essentially one of fact.

A person’s second or holiday home or accommodation used for holiday letting is a dwelling house. A block of flats is not a dwelling house although the individual flats within the block may be. A hospital, a prison, a nursing home or hotel (run as a trade and offering services, whether by the owner-occupier or by a tenant) are not dwelling houses.

A University hall of residence may be one of the most difficult types of premises to decide because there are so many variations in student accommodation. On the one hand, an educational establishment that provides on-site accommodation purely for its own students, where, for example, the kitchen and dining facilities are physically separate from the study-bedrooms and may not always be accessible to the students, is probably an institution, rather than a “dwelling-house”. But on the other hand, cluster flats or houses in multiple occupation, that provide the facilities necessary for day-to-day private domestic existence (such as bedrooms with en-suite facilities and a shared or communal kitchen/diner and sitting room) are dwelling-houses. Such a flat or house would be a dwelling-house if occupied by a family, a group of friends or key workers, so the fact that it may be occupied by students is, in a sense, incidental.

The common parts (for example the stairs and lifts) of a building which contains two or more dwelling houses will not, however, comprise a dwelling-house.

https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca11520

steve@bicknells.net

HMO Landmark VAT Case allowing Zero Rating Reply

mounting thermal insulation boards

VAT Zero HMO 1

 

This is definitely a case which will be of interest to anyone converting commercial property to residential use.

The case is Capital Focus Limited v HMRC TC05193 Appeal number TC/2015/04891.

Capital Focus purchased Tintern House in Banbury, Oxfordshire in August 1994, it was a commercial building and they intended to create one large residential building so they started work and reclaimed the VAT, however, they changed their mind and decided to create an HMO instead.

HMRC allowed the £45,000 input tax claim on the basis that it would be supply of a non-residential building converted to residential use and therefore zero-rated under Item 1(b), Group 5 of schedule 8 to the Value Added Tax Act 1994 (“VATA”)
On 22 April 2015 HMRC wrote to the Company stating that, because it had been converted for multiple occupancy, the sale of Tintern House
was not a zero-rated but an exempt supply and any input tax incurred that was directly attributable to it was not recoverable.
HMRC lost the case, here is the result..
VAT Zero HMO

Extra 3% Stamp Duty on Buy to Lets – but what if you have a property company? Reply

To Let

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

George Osborne said the new surcharge would raise £1bn extra for the Treasury by 2021.

https://i1.wp.com/media.property118.com/wp-content/uploads/2015/11/SYQKJE07TB.jpg

But, commercial property investors, with more than 15 properties, are expected to be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

See my blogs, click to read

5 reasons why you need a Property Investment Company!

10 ways to pay less Property Tax (Investors)

steve@bicknells.net

Contact Us

 

5 reasons why you need a Property Investment Company! 9

Student house

There are many reasons why using a company to invest in residential property is good idea and Summer Budget 2015 made companies an even more attractive option.

1. Restriction of Mortgage Interest Tax Relief

Currently this is just a ‘Policy Paper’ but the plan is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

This link shows some worked examples – Mortgages for Business

Most investors will have multiple properties and high levels of borrowing.

Furnished Holiday Lets are excluded from the restriction – Official Policy

2. Corporation Tax Rates

The current rate of Corporation Tax is 20% but its falling year on year and by 2020 it will be 18%.

Not only that, its the same rate no matter how many companies you have, previously when there were multiple Corporation Rate if you had associated companies the small companies rate was reduce in a marginal rate calculation.

Individual tax rates are

Basic rate                             20% Up to £31,785
Higher rate                            40% £31,786 to £150,000
Additional rate 45% Over £150,001

3. Capital Gains Tax

Capital Gains Tax is at 20% in companies (falling to 18% by 2020) and companies are allowed to apply HMRC Indexation Allowance to offset the effect of inflation.

Capital gain - company

Individuals get an annual allowance of £11,100 and basic rate tax payers pay 18% with higher rate tax payers paying a massive 28% with no indexation.

There are special rules for UK Companies owned by Non UK Residents.

There is no rollover relief for companies or individuals investing in Residential Property because investment isn’t a trading activity.

4. Stamp Duty

Stamp Duty (SDLT) on selling Shares is 0.5%.

ExampleSo £1,995 × 0.5% = £9.97. This is rounded up to the nearest £5, which means you pay £10 Stamp Duty.

Stamp Duty on Property Sales is calculated as follows

• No stamp duty will be paid on the first £125,000 of a property
• 2% will be paid on the portion up to £250,000
• 5% is paid for the portion up to £925,000
• 10% is paid on the portion up to £1.5m
• 12% is paid on anything above that

HMRC have a calculator, here is link

http://www.hmrc.gov.uk/tools/sdlt/land-and-property.htm

But you should also consider ATED (Annual Tax on Enveloped Dwellings) – more details in this blog – https://stevejbicknell.com/2014/09/12/more-tax-on-companies-owning-high-value-residential-property/

SDLT is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies (or ‘non-natural persons’). These include:

  • companies
  • partnerships including companies
  • collective investment schemes

The 15% rate doesn’t apply to property bought by trustees of a settlement or bought by a company to be used for:

  • a property rental business
  • property developers and trader
  • property made available to the public
  • financial institutions acquiring property in the course of lending
  • property occupied by employees
  • farmhouses

The standard residential rate of SDLT applies in these cases. These exclusions are subject to specific conditions.

If 6 or more properties form part of a single transaction the rules, rates and thresholds for non-residential properties apply.

5. Inheritance Tax (IHT) and Potentially Exempt Transfers planning

One of the big benefits of Shares is that its easy to split ownership.

Potentially Exempt Transfers (PET’s) allow you to give away shares provided you survive more that 7 years after the transfer, shares make PETs easy and simple.

When you give away shares it will potentially trigger a capital gain but you will be able to use your personal capital gains allowance of £11,100 to offset this gain.

steve@bicknells.net

Is a Company the best way forward for Buy to Lets? Reply

Mosaïque de logements

The Summer Budget made this decision even more complicated!

First landlords have a lot to consider..

  1. Transferring their portfolio will probably incur Stamp Duty and Capital Gains
  2. Mortgages can be harder to find and more expensive for companies
  3. Share ownership options and objectives
  4. Company Admin, Accounts and Tax
  5. Capital Gains Allowances, ATED and IHT

But one key advantage is explained by Adrian Benosiglio, real estate tax partner at Baker Tilly (www.yourmoney.com)

For example, Mr Jones (a 45% taxpayer) has a house with net rental income of £100,000 and mortgage interest of £90,000. Currently he would pay £4,500 income tax on profits of £10,000.

From April 2020, he’ll pay £27,000* income tax. This is calculated by applying his marginal rate of tax to his rental income (£100,000 x 45%) which gives a tax liability of £45,000 and offsetting this with tax relief claimed on the mortgage interest at the lower amount of 20% (90,000 x 20%) which would give tax relief of £18,000. This would leave Mr Jones with a tax bill of £27,000 (£45,000 less £18,000). The end result would be an overall annual loss after tax of £17,000, with insufficient cash flow to make repayments on his loan.

A company is not affected by these measures and therefore would receive full mortgage interest relief. Additionally, corporation tax is charged at 20% and is due to fall to 18% in 2020. Using the above example, a company would pay £2,000 currently and £1,800 from 2020; leaving sufficient funds to make repayments.

Complicated isn’t it!

steve@bicknells.net

Are there any tax advantages to HMOs? Reply

Student house

The Official definition of an HMO is….

Your home is a House in Multiple Occupation (HMO) if both of the following apply:

  • at least 3 tenants live there, forming more than 1 household
  • you share toilet, bathroom or kitchen facilities with other tenants

Your home is a large HMO if all of the following apply:

  • it’s at least 3 storeys high
  • at least 5 tenants live there, forming more than 1 household
  • you share toilet, bathroom or kitchen facilities with other tenants

A household is either a single person or members of the same family who live together. A family includes people who are:

  • married or living together – including people in same-sex relationships
  • relatives or half-relatives, eg grandparents, aunts, uncles, siblings
  • step-parents and step-children

Typically your tenants are likely to be:

  • Students
  • Transient and foreign workers
  • LHA claimants (Local Housing Allowance)
  • Low paid workers

Here is really useful guide from The House Crowd (2014)

HMO’s are popular because they have higher yields than other Buy to Let Residential Properties.

Many investors believed they could claim Capital Allowances on HMO’s Plant & Machinery but that isn’t the case.

HMRC’s considered view published in its capital allowances manual is that:

“A dwelling house is a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.  In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but difficult cases may need to be decided on their particular facts. In such cases the question is essentially one of fact … cluster flats or houses in multiple occupation, that provide the facilities necessary for day-to-day private domestic existence (such as bedrooms with en-suite facilities and a shared or communal kitchen/diner and sitting room) are dwelling-houses. Such a flat or house would be a dwelling-house if occupied by a family, a group of friends or key workers, so the fact that it may be occupied by [say] students is, in a sense, incidental.  The common parts (for example the stairs and lifts) of a building which contains two or more dwelling houses will not, however, comprise a dwelling-house.” (CA11520)

So here is quick summary of ways to save tax on residential properties in general….

1. Claim allowable expenses

  • Mortgage or Loan Interest (but not capital)
  • Repairs and maintenance (but not improvements)
  • Decorating
  • Gardening
  • Cleaning
  • Travel costs to and from your properties for lettings or meetings
  • Advertising costs
  • Agents fees
  • Buildings and contents insurance
  • Ground Rent
  • Accountants Fees
  • Rent insurance (if you claim the income will need to be declared)
  • Legal fees relating to eviction

2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year

3. Claim for repair and advertising expenses incurred in getting the property ready for renting

4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property

5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.

6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest

7. Claim the Energy Saving allowance  for energy saving work and save £1,500

steve@bicknells.net

The VAT advantages of a development company Reply

Group of construction workers. House renovation.

Property Development is a trade, where as Property Investment isn’t – renting out a residential property is a VAT exempt supply.

If you are planning significant building work, setting up a Development Company or using a building contractor might save VAT.

Assuming you employ a builder…

The VAT Rules are in VAT Notice 708 Buildings & Construction

Your builder may be able to charge you VAT at the reduced rate of 5 per cent if you are converting premises into:

  • a ‘single household dwelling’
  • a different number of ‘single household dwellings’
  • a ‘multiple occupancy dwelling’, such as bed-sits, or
  • premises intended for use solely for a ‘relevant residential purpose’

As your builder will be VAT registered, they reclaim the VAT they are charged and then charge you VAT at 5%.

If your business is property rental and you do the work yourself, you can’t take advantage of the 5% rate.

If your Development Company is VAT registered you can reclaim all the VAT.

Get your existing business or your property development company to convert the property and then sell it to another company that you own (may be an SPV)  will be a  VAT Zero Rated transaction. The other company then carries on the rental business.

steve@bicknells.net